ISSN 1813-2715 2010 SUBSCRIPTION Economic Policy Reforms Going for Growth 2010 The world is currently facing the aftermath of the worst financial crisis since the Great Depression. Going for Growth 2010 examines the structural policy measures that have been taken in response to the crisis, evaluates their possible impact on long-term economic growth, and identifies the most imperative reforms needed to strengthen recovery. In addition, it provides a global assessment of policy reforms implemented in OECD member countries over the past five years to boost employment and labour productivity. Reform areas include education systems, product market regulation, agricultural policies, tax and benefit systems, health care and labour market policies. The internationally comparable indicators provided here enable countries to assess their economic performance and structural policies in a wide range of areas. In addition, this issue contains three analytical chapters covering: • intergenerational social mobility; • prudential regulation and competition in banking; • key policy challenges in Brazil, China, India, Indonesia and South Africa. www.oecd.org/economics/goingforgrowth ISBN 978-92-64-07996-0 12 2010 03 1 P -:HSTCQE=U\^^[U: www.oecd.org/publishing 2010 Economic Policy Reforms Going for Growth OECD’s books, periodicals and statistical databases are now available via www.SourceOECD.org, our online library. This book is available to subscribers to the following SourceOECD theme: General Economics and Future Studies Ask your librarian for more details of how to access OECD books online, or write to us at SourceOECD@oecd.org Economic Policy Reforms Going for Growth 2010 Structural Policy Indicators, Priorities and Analysis Economic Policy Reforms 2010 GOING FOR GROWTH ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT The OECD is a unique forum where the governments of 30 democracies work together to address the economic, social and environmental challenges of globalisation. The OECD is also at the forefront of efforts to understand and to help governments respond to new developments and concerns, such as corporate governance, the information economy and the challenges of an ageing population. The Organisation provides a setting where governments can compare policy experiences, seek answers to common problems, identify good practice and work to co-ordinate domestic and international policies. The OECD member countries are: Australia, Austria, Belgium, Canada, the Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, New Zealand, Norway, Poland, Portugal, the Slovak Republic, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States. The Commission of the European Communities takes part in the work of the OECD. OECD Publishing disseminates widely the results of the Organisation’s statistics gathering and research on economic, social and environmental issues, as well as the conventions, guidelines and standards agreed by its members. ISBN 978-92-64-07996-0 (print) ISBN 978-92-64-07997-7 (PDF) DOI 10.1787/growth-2010-en Series: ISSN 0000-0000 (print) ISSN 0000-0000 (online) Also available in French: Réformes économiques : Objectif croissance 2010 Corrigenda to OECD publications may be found on line at: www.oecd.org/publishing/corrigenda. © OECD 2010 You can copy, download or print OECD content for your own use, and you can include excerpts from OECD publications, databases and multimedia products in your own documents, presentations, blogs, websites and teaching materials, provided that suitable acknowledgment of OECD as source and copyright owner is given. All requests for public or commercial use and translation rights should be submitted to rights@oecd.org. Requests for permission to photocopy portions of this material for public or commercial use shall be addressed directly to the Copyright Clearance Center (CCC) at info@copyright.com or the Centre français d’exploitation du droit de copie (CFC) at contact@cfcopies.com. This work is published on the responsibility of the Secretary-General of the OECD. The opinions expressed and arguments employed herein do not necessarily reflect the official views of the Organisation or of the governments of its member countries. ECONOMIC POLICY REFORMS: GOING FOR GROWTH © OECD 2010 3 www.oecd.org/economics/goingforgrowth Going for Growth was launched in 2005 as a new form of structural surveillance complementing the OECD’s long-standing country and sector-specific surveys. In line with the OECD’s 1960 founding Convention, the aim is to help promote vigorous sustainable economic growth and improve the well-being of OECD citizens. This surveillance is based on a systematic and in-depth analysis of structural policies and their outcomes across OECD members, relying on a set of internationally comparable and regularly updated indicators with a well-established link to performance. Using these indicators, alongside the expertise of OECD committees and staff, policy priorities and recommendations are derived for each member. From one issue to the next, Going for Growth follows up on these recommendations and priorities evolve, not least as a result of governments taking action on the identified policy priorities. Underpinning this type of benchmarking is the observation that drawing lessons from mutual success and failure is a powerful avenue for progress. While allowance should be made for genuine differences in social preferences across OECD members, the uniqueness of national circumstances should not serve to justify inefficient policies. In gauging performance, the focus is on GDP per capita, productivity and employment. As highlighted in the past and again in this issue, this leaves out some important dimensions of well-being. For instance, while a high GDP per capita tends to make for better health and education outcomes, it is not sufficient to ensure social cohesion, even if higher employment helps. However, for economic policy purposes, GDP per capita and employment measure well-being better than any other available indicators. Going for Growth is the fruit of a joint effort across a large number of OECD Departments. EDITORIAL ECONOMIC POLICY REFORMS: GOING FOR GROWTH © OECD 2010 4 Editorial Shifting gears OECD countries seem poised for a modest, uneasy, yet much-welcome recovery. This prospect was far from granted a year ago, and owes a great deal to the exceptional monetary, fiscal and financial policies that policymakers across the OECD and beyond have implemented over the past 18 months. However, the recession has left deep scars that will be visible for many years to come. The crisis has lowered living standards and employment on a durable basis, and at the same time, endangered the sustainability of public finances in many OECD countries. Yet there is still time to minimise these scars through appropriate policy action. A more positive economic outlook means policymakers should increasingly phase out some of the exceptional policy initiatives that they took in a crisis context, while at the same time maintaining or reinforcing other measures, launching new reforms and resisting protectionist and Malthusian temptations in international trade and labour markets. Candidates for gradual removal include the exceptional government support to automotive and other industries, public funding for new infrastructure projects, and crisis-related increases in unemployment benefits where these were already fairly high. By contrast, areas where reform efforts could be strengthened include reductions in anti-competitive product market regulations to boost activity and job creation, increased use of price instruments in green growth policies, and active labour market policies, which will need to cope with the sizeable recent and prospective rise in unemployment better than they did in past downturns. It also makes sense to maintain recent tax support to private R&D and targeted labour tax cuts as long-term growth support measures, but only where these can be financed. Indeed restoring fiscal sustainability will be a daunting task for most OECD governments in the years ahead. Fulfilling this task, while protecting long-term growth, will require reaping efficiency gains on spending, especially in the areas of education and health, and avoiding large increases in harmful labour and capital taxes. These areas have been addressed in previous volumes of Going for Growth. So far, so good. OECD countries have avoided the major structural policy mistakes of certain past crises, such as the protectionist spiral of the 1930s or the misguided labour market policies of the 1970s. In fact, the lead chapter of this year’s edition of Going for Growth finds that in line with last year’s recommendations, many of the measures taken in the areas of R&D, infrastructure, labour taxes and active labour market policies will help to contain the long term damage of the crisis for welfare. There is no room for complacency, however. Our in-depth assessment of reform progress over the past five years across the OECD (Chapter 2) shows that reforms are more incremental than radical in nature and they infrequently address the thorniest issues. It is not at all clear that structural reform has accelerated since the start of the crisis, as policymakers have understandably focused on the most pressing macroeconomic issues. But with the nadir of the crisis now behind us, EDITORIAL ECONOMIC POLICY REFORMS: GOING FOR GROWTH © OECD 2010 5 the time has come to move away from crisis management mode towards speeding up the recovery and laying the ground for a more sustainable and fairer economic future. In this spirit, the country notes in this year’s edition of Going for Growth (Chapter 3) highlight for each OECD country those policy priorities which we think would be most urgent to address at the current juncture. Structural reform in financial, product and labour markets has to be part of the cure. This is fairly obvious for financial market regulation, whose past deficiencies have been a major force behind this crisis and where the crisis response has left new challenges in the form of moral hazard and weak competition. It may seem less obvious at first glance for product and labour market reforms. Indeed, with this crisis having shaken our thinking on financial market regulation, one might naturally wonder whether longstanding policy prescriptions in these other areas should be revisited as well. The broad qualified answer has to be No. As dramatic as they have been, recent events have not radically altered the large income per capita gaps that prevail across the OECD, which a wealth of empirical evidence traces back to cross-country differences in education systems, labour market institutions, product market regulations or the design of tax and welfare systems, among a broad range of factors. In fact, the damage of the crisis on income levels and public budgets, and to some extent the need to address global current account imbalances, have if anything strengthened the case for reform. This of course does not imply that there is a single road to Rome, and indeed different countries can, and often do, opt for different but still efficient trade-offs between growth, risk and equity objectives. Given the centrality of financial markets to the origins of the crisis, regulators across the OECD need to step up ongoing efforts to strengthen financial market regulation. On this front, our recent analysis summed up in Chapter 6 brings some good news: outside a few specific areas of regulation, there is no evidence of any conflict between banking sector stability and competition objectives. It should thus be possible to strengthen regulatory frameworks while preserving the benefits from competition, in terms of access to and price of financial services. This is a very encouraging message and a call for action, at a time when reform efforts may risk being watered down or even stalled. With the crisis having revealed the disproportionate gains that high-income households have enjoyed in recent years, income distribution and equity issues, which were already a major policy concern, have moved to centre stage. One key dimension of equity within our societies is intergenerational social mobility, which promotes equal opportunity for individuals and enhances growth by putting all of society’s human resources to their best use. OECD work points to major cross-country differences in this regard, and links them to education and income distribution policies (Chapter 5). In a number of OECD countries, there appears to be quite some room for enhancing intergenerational mobility at no cost or even at a benefit through education reform, including by increasing enrolment in early childhood education, avoiding early tracking of students and improving the social mix within schools. Finally, this year’s edition of Going for Growth looks for the first time at the long-term prospects and challenges for Brazil, China, India, Indonesia and South Africa to catch up to OECD living standards (Chapter 7). Taken together, the “BIICS” – with which the OECD has established a relationship of “enhanced engagement” – have been an important engine for world growth through this crisis, and they account for a growing share of global output. At the same time, notwithstanding major improvements in human capital that bode well for future productivity trends, our analysis highlights a number of policy areas where reform will be needed to sustain strong growth going forward. With some differences across the BIICS, challenges include moving towards more competition-friendly product market regulation, strengthening property rights and contract enforcement, deepening financial markets and adopting multi-faceted strategies to reduce the size of EDITORIAL ECONOMIC POLICY REFORMS: GOING FOR GROWTH © OECD 2010 6 informal sectors. Our Going for Growth exercise is an evolving process, and this chapter is a stepping stone towards mainstreaming the “enhanced engagement” countries in future editions, along with the incorporation of OECD accession countries. Pier Carlo Padoan Deputy Secretary-General and Chief Economist, OECD TABLE OF CONTENTS ECONOMIC POLICY REFORMS: GOING FOR GROWTH © OECD 2010 7 Table of ContentsTable of Contents Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Part I Taking Stock of Structural Policies in OECD Countries Chapter 1. Responding to the Crisis while Protecting Long-term Growth . . . . . . . . . . 17 Growth-enhancing structural policy responses to the crisis. . . . . . . . . . . . . . . . . . . . 21 Sustainable growth after the crisis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 Chapter 2. Responding to the Going for Growth Policy Priorities: an Overview of Progress since 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 Annex 2.A1. Constructing Qualitative Indicators of Reform Action . . . . . . . . . . . . . 79 Annex 2.A2. Incorporating Terms-of-Trade Gains and Losses into International Income Comparisons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 Chapter 3. Country Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 Chapter 4. Structural Policy Indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155 Part II Thematic Studies Chapter 5. A Family Affair: Intergenerational Social Mobility across OECD Countries . . 181 Intergenerational social mobility reflects equality of opportunities . . . . . . . . . . . . . 182 Assessing intergenerational social mobility and its channels . . . . . . . . . . . . . . . . . . 184 Cross-country patterns in intergenerational social mobility . . . . . . . . . . . . . . . . . . . 184 How do policies and institutions affect intergenerational social mobility? . . . . . . . 190 Concluding remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 196 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 196 Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197 TABLE OF CONTENTS ECONOMIC POLICY REFORMS: GOING FOR GROWTH © OECD 2010 8 This book has StatLinks2 A service that delivers Excel ® files from the printed page! Look for the StatLinks at the bottom right-hand corner of the tables or graphs in this book. To download the matching Excel ® spreadsheet, just type the link into your Internet browser, starting with the http://dx.doi.org prex. If you’re reading the PDF e-book edition, and your PC is connected to the Internet, simply click on the link. You’ll nd StatLinks appearing in more OECD books. Chapter 6. Getting it Right: Prudential Regulation and Competition in Banking. . . . . 199 Introduction and main findings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200 Prudential banking regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 201 Prudential regulation and competition in banking. . . . . . . . . . . . . . . . . . . . . . . . . . . . 201 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 206 Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 207 Chapter 7. Going For Growth in Brazil, China, India, Indonesia and South Africa . . . . 209 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210 Overview of performance differences among the BIICS and vis-à-vis OECD countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213 Applying the Going for Growth framework to the BIICS . . . . . . . . . . . . . . . . . . . . . . . . 223 Other policy reforms to speed up convergence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 236 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 241 Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 242 [...]... OECD Countries ECONOMIC POLICY REFORMS: GOING FOR GROWTH © OECD 2010 Economic Policy Reforms Going for Growth © OECD 2010 PART I Chapter 1 Responding to the Crisis while Protecting Long-term Growth OECD countries have taken a wide range of measures in response to the crisis, notably in the areas of infrastructure investment, taxes, the labour market, regulatory reforms and trade policy This chapter assesses... USA United States USD ECONOMIC POLICY REFORMS: GOING FOR GROWTH © OECD 2010 9 Economic Policy Reforms Going for Growth © OECD 2010 Executive Summary T he OECD countries experienced a major financial crisis that led to the deepest recession since the Great Depression Governments and central banks swiftly took unprecedented steps to save the financial system, and a wide range of policy measures were undertaken... should therefore be preferred to 32 ECONOMIC POLICY REFORMS: GOING FOR GROWTH © OECD 2010 I.1 RESPONDING TO THE CRISIS WHILE PROTECTING LONG-TERM GROWTH Box 1.2 How do structural policies affect the reaction of economies to macroeconomic shocks? Many policy priorities identified in Going for Growth influence not only long-term material living standards but also how economies react to various macroeconomic... limited role for financial intermediation Policies directed at financial deepening, including improved regulation, could boost firm size, capital accumulation and productivity The application of the Going for Growth framework to the BIICS is more difficult than for OECD countries since the full range of policy and performance indicators are currently not ECONOMIC POLICY REFORMS: GOING FOR GROWTH © OECD... into Going for Growth increases the heterogeneity of country coverage Nevertheless, the exercise illustrates the flexibility and robustness of the Going for Growth framework, that will be refined as part of the full integration of new countries into the exercise in subsequent years 14 ECONOMIC POLICY REFORMS: GOING FOR GROWTH © OECD 2010 PART I Taking Stock of Structural Policies in OECD Countries ECONOMIC. .. re-structuring, and thereby reduce longer-term growth Therefore, the elaboration of exit strategies and the clarification of the longer-term regulatory framework are ECONOMIC POLICY REFORMS: GOING FOR GROWTH © OECD 2010 21 I.1 RESPONDING TO THE CRISIS WHILE PROTECTING LONG-TERM GROWTH Table 1.1 Financial market measures taken Country Government financial support for the financial sector Increase deposit... marginal rates Reductions in nonwage labour costs for Fiscal measures for new or continuing low earners workers Austria Income tax measures Australia Country Table 1.5 Tax and R&D measures I.1 RESPONDING TO THE CRISIS WHILE PROTECTING LONG-TERM GROWTH ECONOMIC POLICY REFORMS: GOING FOR GROWTH © OECD 2010 I.1 RESPONDING TO THE CRISIS WHILE PROTECTING LONG-TERM GROWTH increases in exemption levels, and decreases... levels, and examines structural policy challenges to deliver strong and sustainable growth going forward The main conclusions are that OECD countries have so far avoided major mistakes – in particular concerning trade and labour market policies – but some risks remain The crisis has in general reinforced the need for structural reforms These reforms could help to speed up the ongoing recovery, strengthen... wage adjustment and thereby may allow quicker return to potential ECONOMIC POLICY REFORMS: GOING FOR GROWTH © OECD 2010 33 I.1 RESPONDING TO THE CRISIS WHILE PROTECTING LONG-TERM GROWTH Box 1.2 How do structural policies affect the reaction of economies to macroeconomic shocks? (cont.) Structural policy influences on resilience to macroeconomic shocks Flexible labour and product market regulation (1st... can to a large extent be explained by structural policy factors that are the basis on which structural policy priorities are identified in Going for Growth The main reform 11 EXECUTIVE SUMMARY patterns that emerge from the stocktaking exercise carried out over the period 20052009 are the following: ● OECD countries have followed up on Going for Growth policy priorities since 2005 Twothirds of them took . of its member countries. ECONOMIC POLICY REFORMS: GOING FOR GROWTH © OECD 2010 3 www.oecd.org/economics/goingforgrowth Going for Growth was launched in 2005 as a new form of structural surveillance complementing. subsequent years. ECONOMIC POLICY REFORMS: GOING FOR GROWTH © OECD 2010 PART I Taking Stock of Structural Policies in OECD Countries Economic Policy Reforms Going for Growth © OECD 2010 17 PART. structural policy factors that are the basis on which structural policy priorities are identified in Going for Growth. The main reform EXECUTIVE SUMMARY ECONOMIC POLICY REFORMS: GOING FOR GROWTH